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Prioritizing debt consolidation may seem like a good idea if you really want to improve your financial situation faster. However, you need to understand that it is only applicable to certain situations. Yes, there are situations when paying off all your debts at once is not a good idea.

Do not get us wrong. Getting rid of debt is generally a good idea. But you have to realize that there are instances when it will only make other financial goals harder to reach or it will cost you more in terms of penalties and charges.

While this is a reality of prioritizing debt consolidation, that does not mean there are no people trying to pay off their debts as soon as possible. In fact, one survey revealed that 66% of their respondents considered paying off debt as a priority. This was even greater than the need to fund their children’s college fund or their retirement savings.

It is true that the personal finances of every individual will vary. So if you really want to prioritize your debt payments, that is up to you. But to make sure that you can maximize the benefits of your chosen debt relief program, you need to understand how debt consolidation can affect your overall financial position.

Important rules when prioritizing debt consolidation

As you are prioritizing debt consolidation, you need to get to know how it works completely. First of all, the consolidation means you will be using credit to pay off all your original debts. This will basically combine all your balance under one credit account. If you do it correctly, you will even get better terms – that means a lower interest rate and no fees.

Given these changes, you need to analyze how that will affect your current financial position as a whole.

Paying off credit card debts

Definitely, this will have a positive effect on your credit card debts. This is the type of debt that has the highest interest rate. If you can get a lower rate, it is possible for you to save a lot of money. Not only that, it may even be possible to get rid of credit card debt within the year.

So prioritizing debt consolidation for credit card debts is actually a good idea. This is a debt that you do not need to think twice about paying off immediately. The longer it takes for you to pay it off, the more damage will bring to your financial situation.

But what about your emergency fund? Well, you can prioritize credit card debts over this but you might want to have at least a couple of hundred dollars in your fund first.

All the other debts

Now, what do you do for all the other debts that you owe? Debts like your mortgage, car loans, personal loans, medical bills, and even student loans. Will prioritizing debt consolidation for these debts be a good move?

That depends on a couple of things. First is the prepayment penalty. If you will be required to pay a lot, you might want to reconsider prioritizing debt consolidation. But if you really plan to use your home in debt consolidation, that could work. As long as you have enough equity to cover all your debts and you have a good credit score to get the lowest interest rate, then you should be okay. You can opt to prioritize your debt payments. The same is true for the other debts that you owe.

You should also ask yourself if you will save more money if you pay off the debts now or if you just use the extra money to invest. If you will save more by investing, it might be a better idea to not prioritize debs for now.

Another consideration is your emergency fund. If there is no immediate need to really pay off your debts for now, it might be better to prioritize saving up for your emergency fund. Once you have enough in this fund, you can already start prioritizing debt consolidation.

Dangers of prioritizing debt consolidation

The thing about putting your debt payment first is it will limit your money. This is why you need to be careful about choosing what you should prioritize.

According to reports, 72% of parents reveal that paying down debt is their top priority right now. In particular, they want to make debt management a priority. As you get older, you will use debt and the chances of you having a lot of them will be very high. This is probably why prioritizing debt consolidation is popular among young parents. This is the time when they invest in their home or when they start spending more because of their kids. When you want to build a stable future for your kids, you need to put all your debts in order.

But prioritizing debt consolidation, even if you want to do it for your future also poses a couple of dangers. Here are some of them.

Insufficient emergency fund

Regardless of your financial situation, you need to make sure you have enough emergency fund. Unless you have enough of this, do not prioritize your debt payments. Otherwise, if there is an unexpected situation that happens, you might end up borrowing again.

Inability to save for retirement

Another reason to not prioritize debt consolidation is when you do not have enough retirement fund. As you get older the need for a bigger retirement fund is a must. You have a shorter period left to save up for it. Starting early is a good idea – even if it is only a small amount because you can take advantage of the compound interest. The earlier you start, the more you will benefit from the growth brought about by the compound interest.

Passing up an opportunity to invest

Finally, if prioritizing debt consolidation means you are passing up on an investment that will make you earn more – then it might be beneficial to think twice about your options. If you will not really gain anything by paying some debts in advance through debt consolidation, then might as well leave it as is. Then you can find the extra funds to grow your personal finances.

One of the goals of debt consolidation is to help improve personal finances. You have to understand, though, that it is not because of the debt relief program itself. It is more of the habits that you will learn as you pay off your debts.

The truth is, paying off your debts is not an easy thing to do. And if you use debt consolidation to get out of debt, you will not be getting any debt reduction. That means you have to pay back every single cent that you owe. This can be quite stressful and you might find it to be one of the most challenging things that you can do.

This is the reason why you need to make sure that you will end up with an improved financial future after all your efforts to get out of debt. If you have to work hard for it, you want to ensure that you can maximize the positive effects of this debt solution.

The only way to do that is to implement certain habits that will help improve personal finances after you consolidate your debts.

Life after debt consolidation is not exactly debt freedom

Let us get one thing straight. When we say after consolidating debt, this does not mean you are already debt free. There are two things that you need to remember after you have consolidated your multiple debts.

You still have to pay off your debts

Debt consolidation is a debt repayment tool. It helps you get better terms on your loan. It can be in the form of lower interest rates or lower monthly payments. The bottom line is, it will only restructure your debts. You still owe the same amount of money. More importantly, you still have to pay it all off.

Sometimes, people get a false sense of debt freedom after consolidating debts. After all, their original debts have been paid off. But you should never forget that the payment used is also debt. Now you have to pay off that new debt.

You still have to identify why you got into debt

Another truth that you have to remember is identifying what got you into debt in the first place. If you really want to improve personal finances, you need to identify what this is. Failing to do so might end up landing you in the same financial situation again.

There are man reasons why someone is in debt. Maybe you are overspending and you did not know it. Having a budget plan can solve this. Or maybe you do not have sufficient emergency funds. That means when something unexpected happens, you will be forced to borrow money in order to get past it. Once you solve the real cause of your debt situation, it will be easier for you to improve personal finances and stay out of debt.

Implement these habits to improve your personal finances

So what are the things that you need to do in order to improve your financial situation after consolidating your debts?

Assess your current financial situation

Start by assessing your financial situation. At this point, you just consolidated your debts. As explained, this does not mean you are already free from debt. You still have a long way to go when it comes to completely achieving debt freedom. With this in mind, you need to check your current budget plan. Make sure that it is aligned with the new repayment plan that you have. This will ensure that your monthly payments will be funded. Make it a priority.

Live below your means

After scrutinizing your budget plan, it is time to make a commitment to live below your means. This is also the perfect time to look at your income and expenses. See how much of your earnings go to your bills, debts, and even entertainment expenses. Maybe you can cut back on some of your expenses. According to a recent survey, Americans spend an average of $5,339 on nonessentials. This means it is not necessary for you to survive. If you have a lot of these, you might want to cut back on it. Use the money on something that can improve personal finances instead. You can also check if you can earn more. These will allow you to increase your extra money to pay more towards your debts. Not only that, but it will also give you want you to need to reach other financial goals simultaneously.

Boost your emergency fund

We mentioned that a lack of emergency funds can be a reason to land in debt. If you want to stay out of debt, you need to start saving for an emergency fund. This will ensure that if something unexpected happens, you will not be forced to borrow money. Whether it is an accident, a trip to the ER or a busted transmission, an emergency fund will help pay for these expenses without debt. This fund will also help you be more financially secure. Despite the fact that you are still in debt, this will help lower the stress that comes with paying back any money that you owe.

Commit to saving 5% of your income

The last habit that you need to implement in your life is consistently is saving a part of your income. Based on reports, there is a general increase in savings across all income levels. It seems like people are starting to understand the value of saving more.

What you have to realize is that the amount you save does not have to be a big amount. As long as you are putting away an amount in your savings every month, that will eventually grow. If you consistently save even $100 each week, that will be $400 at the end of the month. In one year, it will be $4,800. If you keep doing this for three years, you will soon have $14,400. This should be enough to help secure your financial future.

With a functional budget plan, smarter spending habits, adequate emergency funds, and increasing savings, it should be easy to improve personal finances. Combine that with your debt freedom and you will find yourself in a stronger and more positive financial position.

Using this type of loan is actually a very effective and popular way to get out of debt. There may be people who even look at it as their first debt relief option. It seems like a logical way to improve your debt payment strategies. Among the benefits that you will get are a lower interest rate, single monthly payment, and even better terms and fees.

Of course, since this is still a loan, you need to qualify for it. Unless you get approval, you will not really enjoy the benefits that debt consolidation loans can bring to your finances. So if you are sure about using this debt relief strategy to get out of debt, you need to make sure that you have what it takes to get debt consolidation loan approval.

Qualifications to get debt consolidation loan approval

The qualification to get approval for a debt consolidation loan might vary. This will depend on the lender that you have chosen to borrow from. It is important for you to consider more than one lender to determine which of them offers the best loan for your debt situation.

While the details might be different, the general qualifications are actually the same. If you want to get debt consolidation loan approval, these are the things that the lender will check out.

Income

While it is possible to consolidate debt even if you are broke, it might be hard to do it through a loan. If you want your loan to be approved, you have to prove that you can afford to pay it back. Obviously, that means having enough income to show them. It is not enough that you can show them that you are earning money. You need to prove to them that it is a steady and stable source of income. That it will be available for a long time.

Not only that, it has to be big enough to make your monthly payments a specific percentage of the income. After all, the lenders know that the income will be used on other expenses too – not just the debt payments. They have to make sure that you can afford to live comfortably and still pay off the debt. If not, there is a high chance that you will skip your debt payments in favor of paying for basic necessities. That is something that they will not risk. If you can prove that, then you are one step closer to getting a debt consolidation loan approval.

Payment history

This is shown through your credit report. One of the things that they will look into is your payment behavior. If you borrowed money in the past, they will look at how you paid it off. Were you always on time? Or did you miss out on a couple of payments? These will affect the approval of the loan. It does not matter if you are earning a lot of money. If you are not responsible enough to pay back your past debts, it will be harder for you to get approval for the loan.

Economic stability

It was mentioned earlier that it is important for you to prove that you can sustain the whole repayment plan for the loan. This is where your economic stability will come into play. As of now, this might not be hard to prove. According to reports, 9 out of 10 workers are secure about their jobs. If you feel the same because you know that you will not be laid off anytime soon, then that is a good sign for the lender.

But that is not all that they will look into. They will also check how long you stayed in your job. If you are new, there is a greater risk that you will lose your job or get laid off. The lender will also check if you kept on moving houses. These are all signs of an unstable lifestyle so you need to make sure it will not affect your debt consolidation loan application.

Collateral

To be clear, not all debt consolidation loans require collateral. If you have a good credit score, you can borrow an unsecured loan to help consolidate your debts. But if you do not have that, then offering collateral will help make your interest rate lower. It will also give you more money to work with – allowing you to consolidate a lot of debts. Of course, if you will use collateral, the lender will have to approve that as well. It has to have enough equity to cover the amount that you want to borrow. Even if your equity is $50,000, you cannot borrow everything, just a percentage of that.

What to do after getting debt consolidation loan approval

After you get a debt consolidation loan approval, do not think that the job is done. You still have a lot of things to do. Contrary to what you may believe, the approval is not the end of your debt relief program. Although all your original debts are paid off, you still owe the same amount of money. You just transferred your balance under one account.

This is why you need to make sure that you do not fall under a false sense of debt freedom. There is still a long way to go but it will be easier if you do the following.

Pay off your multiple debts immediately

As soon as you get the debt consolidation loan approval, you need to use the money immediately to pay off your debts. You want to do this as soon as possible because the longer the money stays in your hands, the more tempting it will be to use it for something else.

Have a repayment plan

Ideally, you should have a repayment plan before you get a debt consolidation loan approval. Planning the repayment will force you to look at your finances so you can determine if you can afford the future payments or not. It will encourage you to borrow only what is necessary. At the same time, it will also help you get the payments started after the loan is approved. This plan will serve as your guide as you slowly complete your journey towards debt freedom.

Revise your budget plan

To be successful at any debt relief option, you need to pay attention to certain budgeting tips so you can get to debt freedom easily. If you have a repayment plan, you need to check your budget plan to ensure that it will be aligned with each other. Your budget plan should support your repayment plan. If not, it will be hard for you to completely pay off your debts according to your repayment strategy.

Stop borrowing money

Finally, you should also stop borrowing money after you get the debt consolidation loan approval. You will not completely eliminate the use of credit. But you have to stop borrowing while you are still paying off what you owe. If you keep on borrowing, your debt payments will never end. It will always be there adding to the stress that you are already feeling. You can still use credit in the future but make sure that you know how to use it wisely. That way, you will never land in the same destructive debt situation again.